Opinion
G053364
08-21-2018
INVESTORS WARRANTY OF AMERICA, INC., et al., Plaintiffs and Appellants, v. CHICAGO TITLE INSURANCE COMPANY et al., Defendants and Respondents.
Buchalter Nemer, John L. Hosack, Robert M. Dato and Jason E. Goldstein for Plaintiffs and Appellants. Hennelly & Grossfeld, Michael G. King and Susan J. Williams for Defendants and Respondents.
ORDER DENYING PETITION FOR REHEARING AND MODIFYING OPINION; NO CHANGE IN JUDGMENT
The petition for rehearing filed by appellants is DENIED.
It is hereby ordered that the opinion filed herein on August 21, 2018, is modified in the following particulars:
1. On page 22, delete the first two full paragraphs (the two under the heading "2. Application to this case") and insert the following paragraph in their stead:
"Together, Rosen, Moskopolos, Barczewski and Liberty Enterprises winnow out much of the possibility of coverage for Transamerica-Investors from RE's suit. Specifically, they eliminate any possibility of coverage for claims arising out of Investors' 2009 notice of default as manifested in RE's amended complaint. Regardless of whether Investors may have been legally compelled to list all loans in default in its 2009 notice of default, or whether that listing was a voluntary decision on Investors' part (cf. RE-1, supra, 212 Cal.App.4th at pp. 1437-1438), it is inescapable that any exposure to Investors from RE's amended complaint was based on an act arising years after the date of the policy and thus not covered under exclusion 3(d)."
This modification does not effect a change in the judgment.
BEDSWORTH, ACTING P. J. WE CONCUR: FYBEL, J. IKOLA, J.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2011-00478389) OPINION Appeal from a judgment of the Superior Court of Orange County, Mary Fingal Schulte, Judge. Affirmed in part, reversed in part and remanded with directions. Buchalter Nemer, John L. Hosack, Robert M. Dato and Jason E. Goldstein for Plaintiffs and Appellants. Hennelly & Grossfeld, Michael G. King and Susan J. Williams for Defendants and Respondents.
I. INTRODUCTION
This is an eye-wateringly complex title insurance coverage case arising out of a complicated triangular loan transaction between a big lender, a small lender, and a now defunct California winery. The big lender refinanced a prominent Paso Robles winery. The small lender already had a lien on some of that winery's property for about $6.5 million, but agreed to subordinate its lien to the big lender's lien of $4 million - but only the $4 million. Unfortunately, the $4 million lien was part of an overall $21 million loan package and the small lender never agreed to subordinate its loan to the $17 million additionally lent by the big lender (in the form of two other loans, one for $11 million and one for $6 million). The big lender's title insurer issued three separate title policies insuring all three of the big lender's liens (for $4 million, $11 million, and $6 million) and the title policy for the $4 million lien insured the priority of the $4 million lien over the small lender's $6.5 million lien.
Later, the small lender sued the big lender for violation of the subordination agreement, claiming the very deed of trust which secured the $4 million lien itself violated the subordination agreement, hence the agreement was invalid and the small lender's lien should be declared first in priority. The complaint was based on - among other things - the idea that the big lender had violated the subordination agreement by the very act of recording a deed of trust securing the $4 million loan because that deed of trust also gave priority - or at least had been read by the big lender to give priority - to the two other liens as well.
The big lender sought a defense from the title insurer. The title insurer initially agreed and funded that defense for about a year. Then it discontinued its defense when it concluded there had never been any potential for indemnity under the title policy. The title insurer's theory was that the small lender's suit was really about the manner in which the big lender took title to its deed of trust, something title insurance does not cover. (See Safeco Title Ins. Co. v. Moskopoulos (1981) 116 Cal.App.3d 658 (Moskopoulos).) The big lender then filed this coverage case, but the trial court agreed with the title insurer that there was no duty to defend. The big lender now appeals.
While we agree with the trial court that much of the big lender's legal exposure was of its own making, we cannot avoid the fact that whatever else the policy insured, it insured the priority of the $4 million lien as set forth in the relevant deed of trust, and that priority came under direct attack by virtue of a claimed defect inherent in its very recordation. We thus conclude there was a duty to defend - the title insurer owed the big lender a defense of the priority of its $4 million lien. That duty continued until the $4 million lien became no longer vulnerable to attack - which, as it turned out, happened in May 2013 when the appellate court judgment in R.E. Loans, LLC v. Investors Warranty of America, Inc. (2013) 212 Cal.App.4th 1432, 1437 (RE-1) became final. RE-1 squarely held that the big lender's $4 million lien took priority over the small lender's lien.
In light of our reversal of the judgment as it pertains to the duty to defend, the collateral issue arises as to whether the title insurer's discontinuation of the defense of the big lender was objectively reasonable. That issue was also the subject of trial, and the trial court concluded the title insurer's declination of the duty to defend was objectively reasonable. On that point we agree with the trial court.
We reverse the judgment to the extent it declares the title insurer had no duty to defend and remand the matter back to the trial court for further proceedings to calculate the amount owing. As we explain anon, that should be an easy matter since the period of time during which the big lender wasn't paid to defend the underlying action was a discrete period from March 2011 (when the title insurer discontinued its defense) until May 2013 (when any possibility of coverage was definitively eliminated). It was in May 2013 that the underlying case became final and there was no longer any possibility of loss to the big lender. In all other respects the judgment is affirmed.
II. FACTS
A. The Loan
By January 2007, the Paso Robles region had close to 200 wineries and was, as a report to a loan committee for Transamerica Financial Life Insurance Company (Transamerica) would note, the "fastest growing wine region in the state." At the time, a large Paso Robles winery, Martin Weyrich Winery (Weyrich), was looking for about $22 million to refinance its existing loans. Those loans, according to the report, consisted of $22 million from Farm Credit West and $8 million from an entity called R.E. Loans (RE). By refinancing, Weyrich hoped to save about $273,000 in annual interest costs.
Weyrich owned three distinct properties. One was on Buena Vista in Paso Robles, one on Creston Ridge in Paso Robles, and one in San Luis Obispo. The Buena Vista property was easily the most valuable of the three. It consisted of 262.5 acres. On it sat two wineries, a tasting room, an upscale bread and breakfast (known as Villa Toscana), various utility buildings, 45 acres of vineyards planted to a number of grape varietals, and another 137 acres that might yet be planted to vineyards. For clarity's sake we will refer to this property as the "winery property."
The Creston Ridge property consisted of 278 acres which contained Martin Weyrich's large personal residence, some 94 acres of vineyards - also planted to a number of varietals - and an additional 151 acres of plantable land. For clarity's sake we will call this property the "residence property."
The third property, in San Luis Obispo, consisted of 273.6 acres adjacent to a golf country club. About 142 acres of it had been planted to vineyards (the majority to Chardonnay), with another 120 or so acres consisting of ravines or hillsides. It was this property that had been encumbered by the loan from RE.
There were another 20 acres on the San Luis Obispo property in addition to the 273.6. These 20 acres were on nonplantable land and overlooked the Edna Valley (also a premier California wine growing area). The parcel had been valued in 2006 at close to $10 million. Weyrich was in the process of obtaining county approval to develop a 13-lot exclusive residential subdivision on the 20 acres. Accordingly, Transamerica's loan committee did not include the close to $10 million value of those 20 acres in considering the refinancing package.
Nevertheless, Transamerica's loan committee had hopes for those 20 acres. They noted approvals for the subdivision were about 95 percent completed and contemplated Transamerica allowing Weyrich to put a junior lien on the San Luis Obispo property that would be transferred to the 20 acres upon obtaining the approvals for the subdivision. At that point there would no longer be a junior lien on Transamerica's collateral, which would be exclusive of the 20 acres. Because the parties and the RE-1 opinion refer to this property as "Jack's Ranch," that is how we will refer to it in the remainder of this opinion.
There were a number of positive reasons for Transamerica to loan Weyrich money. His winery operations were close to Highway 101, the wine business had a positive "trend line," and Weyrich had what Transamerica thought was a $77 million equity position to back up the projected $22 million loan. The loan committee conservatively valued the actual collateral at about $34 million, which still left Transamerica with a substantial cushion. The sole negative identified under the heading "Underwriting" by the report to the loan committee was the existing lien on the Jack's Ranch collateral held by RE.
Loaning Weyrich enough money to pay off the RE loan was apparently out of the question, so the "negative" of the existing RE lien was handled by a two-step process. First, Transamerica would loan Weyrich enough to pay down the RE loan by $3.5 million. And in return for the paydown, RE would agree to subordinate its lien on Jack's Ranch to a $4 million lien to be held by Transamerica. B. The Loan Documents
The actual subordination agreement recited that Weyrich had applied to Transmerica (referred to in the agreement as "New Lender") for a $4 million loan secured by a first deed of trust. The subordination agreement next noted that RE ("Existing Lender") had an existing deed of trust, then allocuted the fact there would be no loan to Weyrich but for the subordination agreement. The agreement said Transamerica "will not make a new loan to Borrower unless the Existing Lender unconditionally subordinates whatever interest the Existing Lender may have in the Property to the lien and charge of the New First Deed of Trust to be recorded in favor of New Lender."
The subordination agreement then set forth language that limited any subordination to the $4 million lien. It said the subordination agreement was limited by the "principal amount of the new loan" plus "the accrual of interest or other charges that may become due under the terms of the new loan." The subordination agreement went on to provide, in regard to the special unplantable 20 acres of Jack's Ranch (called the "Development Parcel" in the agreement), that - as the loan committee had contemplated - when those acres were developed, Transamerica would release its lien on the 20 acres and RE would have a clear first lien on that parcel. And as noted, as a sweetener for RE, part of the $21 million was to be used to pay down RE's existing loan by $3.5 million.
Here is the relevant language: "Now, therefore, in consideration of the benefits that will result from New Lender's making a new loan to Borrower, the parties hereto agree as fol1ows: [¶] 1. Whatever interest that the Existing Lender has or may have in the Property, including the lien of the Existing Deed of Trust, shall be unconditionally and irrevocably subordinate and junior in priority in all respects to the lien of the New First Deed of Trust to be recorded in favor of New Lender, including all renewals, modifications, and extensions thereof that do not increase the rate of interest that is charged on the new loan, and that do not increase the principal amount of the new loan other than by the accrual of interest or other charges that may become due under the terms of the new loan." (Italics added.)
For easier reading, all caps or bold face in language quoted from any of the loan documents in this opinion have been converted to normal capitalization or font.
Here is the relevant language: "Borrower and New Lender represent and acknowledge that they have agreed that a portion of the Property consisting of approximately twenty (20) acres and defined as the 'Development Parcel' in the Loan Agreement between Borrower and New Lender, shall be released by New Lender from the lien of the New First Deed of Trust contingent upon and at such time as the Development Parcel is made a separate legal parcel or parcels (it is anticipated that the Development Parcel will comprise approximately thirteen legal parcels upon the recordation of a parcel map or maps creating the Development Parcel). At such time as New Lender releases the lien of the New First Deed of Trust as to the Development Parcel, Existing Lender will have a first priority lien against each of the Development Parcel parcels, and Existing Lender agrees to release the lien of the Existing Deed of Trust as to the remaining portions of the Property not comprising the Development Parcel. The above agreement as to the Development Parcel between Existing Lender and New Lender will survive the foreclosure of their respective deeds of trust. Further, and notwithstanding the foregoing, Existing Lender acknowledges and agrees that upon payment to it of the sum of $4,500,000, specifically applicable to the Note secured by the Existing Deed of Trust, Existing Lender will issue a partial reconveyance as to the Existing Deed of Trust releasing the Property from the lien of the Existing Deed of Trust." (Italics added.)
So the larger loan package totaled about $21 million, and was structured in terms of three notes, three deeds of trust, three title insurance policies, and one loan agreement. We will refer to the three documents by the last three digits of their loan numbers used by Transamerica - hence the "192 loan," the "192 deed of trust" the "192 note" etcetera for the winery property, and like referrals for all the 193 and 194 documents. The 192 loan ended up being for about $11.3 million, the 193 loan was for about $6 million, and the 194 Jack's Ranch loan was for about $4 million.
The notes for the 192, 193, and 194 loans were all expressly cross-collateralized and cross-defaulted with each other in corresponding notes. The 192 note said that a default under loans 193 or 194 would be the equivalent of a default under the 192 note. The 193 and 194 notes contained identical language except for referring to the other two notes by number.
The three deeds of trust were similar, but of course not identical since each one had a different property description. Under the heading "secured obligations," each deed of trust included language reciting that among obligations being secured was: "that certain Loan Agreement dated as of even date herewith between Trustor and Beneficiary (hereafter referred to collectively as the 'Loan Documents.')"
That "certain Loan Agreement" was a bilateral agreement between Weyrich and Transamerica contained in a single document. It referred to all three loans (192, 193 and 194) by their loan numbers. It then referred to the fact that each - including loan 194 for the Jack's Ranch property - was being secured by its own deed of trust which granted to the lender a "first priority lien and security interest in the real and personal property described in" the respective deed of trust for that loan.
Transamerica also obtained three separate title insurance policies, again corresponding to the three loans on the three properties. We will call these policies after the loans that generated them: the 192 policy on the winery property loan, the 193 policy on the residence property loan, and finally the 194 policy on the Jack's Ranch property loan.
These policies were all form ALTA policies (for American Land Title Association) as distinct from CLTA policies (for California Land Title Association). For a summary of the differences in the two forms, see Croskey, Cal. Practice Guide: Insurance Litigation (The Rutter Group 2017) ¶ ¶ 6:2610 et seq., pp. 6H-23 et seq. As far as we can tell, any differences are academic as regards the instant case.
The three policies were issued by Chicago Title Insurance Company (Chicago Insurance). All three had the same insuring clause which insured the "priority of any lien or encumbrance over the lien of the insured mortgage." We quote the identical insuring clauses, including a provision the insurer would defend "the lien of the insured mortgage," in the margin.
The briefing refers to Chicago Title Insurance Company as "CTIC" and its related entity Chicago Title Company, which handled the escrow, as "CTC." We will refer to those entities as "Chicago Insurance" and "Chicago Escrow" to make it easier for our eyes and readers to the tell the difference between the two.
"Loan Policy of Title Insurance" [¶] Subject to the exclusions from coverage, the exceptions from coverage contained in Schedule B and the conditions and stipulations, Chicago Title Insurance Company, a Missouri corporation, herein called the Company, insures, as of Date of Policy show in in Schedule A, against loss or damage, not exceeding the Amount of Insurance stated in Schedule A, sustained or incurred by the insured by reason of:
"1. Title to the estate or interest described in Schedule A being vested other than as stated therein;
"2. Any defect in or lien or encumbrance on the title;
"3. Unmarketability of the title;
"4. Lack of a right of access to and from the land;
"5. The invalidity or unenforceability of the lien of the insured mortgage upon the title;
"6. The priority of any lien or encumbrance over the lien of the insured mortgage;
"7. Lack of priority of the lien of the insured mortgage over any statutory lien for services, labor or material:
"(a) arising from an improvement or work related to the land which contracted for or commenced prior to Date of Policy; or
"(b) arising from an improvement or work related to the land which is contracted for or commenced subsequent to Date of Policy and which is financed in whole or in part by proceeds of the indebtedness secured by the insured mortgage which at Date of Policy the insured has advanced or is obligated to advance;
"8. Any assessment for street improvements under construction or completed at Date of Policy which now have gained or hereafter may gain priority over the lien of the insured mortgage;
"9. The invalidity or unenforceability of any assignment of the insured mortgage, provided the assignment is shown in Schedule A, or the failure of the assignment shown in Schedule A to vest title to the insured mortgage in the named insured assignee free and clear of all liens."
Next followed a defense clause: "The Company will also pay the costs, attorneys' fees and expenses incurred in defense of the title or the lien of the insured mortgage, as insured, but only to the extent provided in the Conditions and Stipulations."
Likewise, all three policies had the same form exclusions typically found in title insurance policies, including the oft-litigated 3(a) and 3(d) exclusions. The schedules A of course were different since those schedules described the respective deeds of trust to different properties.
"The following matters are expressly excluded from the coverage of this policy and the Company will not pay loss or damage, costs, attorneys' fees or expenses which arise by reason of: [¶] . . . [¶]
"3. Defects, liens, encumbrances, adverse claims or other matters:
"(a) created, suffered, assumed or agreed to by the insured claimant;
"(b) not known to the Company, not recorded in the public records as Date of Policy, but known to the insured claimant and not disclosed in writing to the Company by the insured claimant prior to the date the insured claimant became an insured under this policy;
"(c) resulting in no loss or damage to the insured claimant;
"(d) attaching or created subsequent to Date of Policy (except to the extent that this policy insures the priority of the lien of the insured mortgage over any statutory lien for services, labor or material or to the extent insurance is afforded herein as to the assessment for street improvements under construction or completed at Date of Policy); or
"(e) resulting in loss or damage which would not have been sustained if the insured claimant had paid value for the insured mortgage."
The 194 policy for the Jack's Ranch deed was, however, unique in having a schedule B that said Transamerica's deed of trust had priority over an existing deed of trust held by RE Loans in the amount of $6.5 million. The other two title policies contained no such language. C. The Litigation
"In addition to the matters set forth in Part I of this Schedule, the title to the estate or interest in the land described or referred to in Schedule A is subject to the following matters, if any be shown, but the Company Insures that these matters are subordinate to the lien or charge of the insured mortgage upon the estate or interest: [¶] 1. A deed of trust to secure an indebtedness in the amount shown below, an any other obligations secured thereby [followed by a description of RE Loans deed of trust from September 2006 in the amount of $6.5 million]. [¶] . . . [¶] By the provisions of an agreement [and then follows a description of the April 20, 2007 subordination agreement executed by RE Loans]." (Italics added.)
1. The Underlying Claim Against Transamerica Investors
What seemed to Transamerica's loan committee like a good idea in 2007 went south in 2009 when Weyrich defaulted on the loan on Jack's Ranch. In mid-July 2009, Transamerica's successor, Investors Warranty of America (Investors), issued to Weyrich a notice of default, specifically referencing the 194 loan (Jack's Ranch).
The assignment from Transamerica to Investors was an internal affair within the greater Aegon financial group. The internal transfer would, in fact, generate its own issue at trial as Chicago Insurance would argue that Investors was not even a bona fide purchaser of Transamerica's rights under the respective insurance policies. That defense, however, has not been briefed by Chicago Insurance as a reason to affirm the judgment so we deem it abandoned for purposes of this appeal. Nevertheless, the close relationship between Transamerica and Investors complicates the narrative. Generally, when we refer to "Investors," it is in a context that is after the 2009 assignment and when we refer to "Transmerica" it is to refer to the actual 2007 transaction. Even so, the two entities are, in the general scheme of our decision, interchangeable.
In the wake of the default, a side question quickly arose as to which lienholder - RE or Investors - would have the right to receive the rents from the Jack's Ranch property. But initially there was no dispute. RE agreed the rents should go to Investors. RE even agreed in 2009 that if a buyer offered to purchase Jack's Ranch, the first $4 million of the proceeds should go to Investors.
However, Investors felt more than $4 million was at stake. Investors asserted the legal position that all three of the deeds of trust took priority over the RE Loan deed of trust, even as applied just to the Jack's Ranch property. Specifically, the trustee for Investors' 194 deed of trust recorded, on Investors' behalf, a notice of default asserting it would take about $26 million to cure the liens on the Jack's Ranch property.
John Titler, an attorney who worked for Transamerica on the April 2007 loan, would later admit that no one from Transamerica told RE (either orally or in writing) that RE was in fact subordinating its loan to the big $21 million package. But, he maintained, any such communication was unnecessary. RE should have figured out its $6.5 million lien was behind all $21 million of Transamerica's liens simply by looking at the loan agreement.
His deposition testimony in this regard bears quoting. Titler had just admitted no one from Transamerica had told RE about its loan being behind all $21 million of Transamerica's loans. He then elaborated:
"A. The loan agreement lays it all out. They had to know what was in the loan agreement. They had liens on all of these properties, and they delivered releases of all of those liens into each of those escrows at these three closings, and they did that because they understood the entire deal terms. If they didn't deliver those releases, they weren't getting the $3 1/2 million. [¶] The subordination agreement itself refers to the loan agreement. They knew what was in the loan agreement. The loan agreement laid out the terms with regard to the 20 acres. That was literally their out card."
While Titler's deposition testimony alludes to the possibility of RE's lien covering all three properties, the record indicates (unless we missed something in the complex title report) that its lien only covered Jack's Ranch. We find no record reference in Investors' briefing to support the idea RE's lien extended to the other two properties.
But RE had not figured out any such thing. Dennis Zentil, the lawyer who represented RE on the transaction back in 2007, would later testify in deposition that RE Loans had received no communication from Transamerica to the effect that RE's loans was being subordinated to $21 million, as distinguished from just the $4 million. Zentil testified that RE's intention was only to subordinate to the $4 million loan. He first learned about Transmerica's claim to a $21 million subordination when he received a copy of its notice of default.
On December 21, 2009, RE filed for declaratory relief in San Luis Obisbo Superior Court. RE asserted that the while it agreed to a $4 million lien against Jack's Ranch, that was all it had agreed to. It specifically referred to the language in the subordination agreement that the subordination was not to increase the principal of the $4 million loan.
RE's theory was that Transamerica had violated the subordination agreement in the very language of the deed of trust to Jack's Ranch. In a phrase from RE's complaint that is quoted several times in the briefing, "[Transamerica's] deed of trust does not secure a new loan in the principal sum of $4,006,600.00 as allowed by the Subordination Agreement; instead it secures a $4,006,600.00 loan, and a second loan for [$]5,192,750.00, and a third loan for $11,277,500.00."
On January 22, 2010, just over a month after RE's suit was filed, Transmerica and its successor Investors requested a defense of the RE action from Chicago Insurance. Chicago Insurance responded just five days later, on January 27, 2010, acknowledging the claim, and asking for certain documents (including all loan workout files and loan payment history).
But there was no reservation of rights in the January 27, 2010 letter. That would come about seven weeks later, in a letter from John Klein, Chicago Insurance's major claims counsel, dated March 24, 2010, announcing that Chicago Insurance would, indeed, defend Transamerica in the suit brought by RE. The reservation of rights in that letter was a general one, and prefaced Klein's announcement that Chicago Insurance had retained the firm of Loeb & Loeb as defense counsel for Transamerica and Investors.
"In connection with providing the insureds with a defense, Chicago reserves all of its rights to continue to investigate this matter. If in the future additional facts come to Chicago's attention which have a bearing on its obligations, Chicago reserves the right to assert any such defenses."
Chicago Insurance funded Transamerica's defense for the next 11 months. During that period Chicago Insurance also retained its own coverage counsel, Glaser Weil Fink Jacobs Howard Avchen & Shapiro (Glaser Weil). On February 8, 2011, Steven Freeman, a lawyer at Glaser Weil, wrote to Investors to say that Chicago Insurance was exercising its right to take an examination under oath of the appropriate representatives of Transmerica and Investors. Freeman announced that Chicago Insurance was investigating "whether coverage [was] available to TransAmerica and/or Investors under the Policy for the R.E. Action."
This letter was quite detailed in the particular coverage defenses that Chicago Insurance might find applicable, including the 3(a) exclusion quoted in footnote 6, ante. Three weeks later, on March 1, 2011, Freeman sent another letter to Investors' counsel, this time to announce that there was no coverage for the "R.E. Action" and to let Transamerica know it would cease funding the defense of that action as of St. Patrick's day, 2011. The letter's thrust was that there was no potential for loss under the title policy for the Jack's Ranch deed of trust because either (a) the underlying action would affirm the priority of the $4 million loan over the RE loan - in which case there was no possible loss - or (b) the underlying action would agree with RE that Transamerica lost that priority by violating the subordination agreement, in which case coverage would be excluded by the "3(a)" exclusion because Transamerica itself had created (suffered, assumed, or agreed to) its own loss. The letter cited a single case in that regard, Moskopoulos, supra, 116 Cal.App.3d 658, which we will discuss in detail in Part III. of this opinion below.
Meanwhile, in San Luis Obispo Superior Court, dueling summary judgment motions clashed. RE prevailed. The trial court agreed with RE's theory that because Transmerica's trust deed had secured $21 million - not just $ 4 million - Transamerica had "failed to comply with the terms of the subordination agreement." (RE-1, supra, 212 Cal.App.4th 1432, 1436.) The trial court thus granted RE's motion for summary judgment, and denied Transamerica's. The upshot of the trial court's decision, had it been left intact, was that even Transamerica's $4 million lien was now behind RE's lien in priority.
This decision did not remain intact. Transamerica appealed, and obtained, in January 2013, a published opinion dealing with RE's theory, RE-1, supra, 212 Cal.App.4th 1432. Substantively, as we explain in more detail below, RE-1 was a split decision.
Transamerica prevailed on the issue of whether its $4 million lien was in jeopardy from RE's claim. It wasn't. The deed of trust securing the $4 million lien was not a violation of the subordination agreement, so the summary judgment in RE's favor was reversed.
But Transamerica's procedural "victory" was pyrrhic in light of what had been Transamerica's larger objective: establishing that all its loans were ahead of RE's. In the course of reversing the judgment, the Court of Appeal made it quite clear that only the $4 million lien was ahead of RE's lien. As far as Jack's Ranch was concerned, the two other, and much larger, liens were behind RE's lien. Transmerica's hopes of seeing all $21 million worth of its investment in the Weyrich winery moved ahead of RE's deed of trust were dashed.
The legal foundation of the RE-1 opinion was the proposition that when "a number of notes are secured by a single trust deed, they are treated as separate secured loans." (RE-1, supra, 212 Cal.App.4th at p. 1438, italics added, citing Hocker v. Reas (1861) 18 Cal. 650.) Thus while Transamerica's deed of trust secured three different notes, only the $4 million note was "senior to RE's trust deed." The reason was because that would have been "the result had each note been secured by its own trust deed." The court could see "no reason why a different result should pertain because the notes [were] secured by a single trust deed." (RE-1, supra, at p. 1438.)
From those premises it followed that the "transaction between Weyrich and Transamerica" did not violate the subordination agreement between Transamerica and RE Loan, "because RE's trust deed was subordinate only to the $4,006,600 loan." "Nothing in the subordination agreement," after all, "prohibit[ed] the creation of liens junior to RE's trust deed." (Ibid.)
Moreover, RE-1 also held that the Weyrich-Transamerica loan agreement did not breach the "subordination agreement's prohibition on modifying the principal amount of the loan." (RE-1, supra, 212 Cal.App.4th at p. 1438.) Returning to its main theme, the RE-1 court said "RE's trust deed was subordinate only to the $4,006,600 loan." (Ibid.) The cross-defaulting made no difference because that cross-defaulting in the Weyrich-Transamerica agreement "was not binding on RE." (Ibid.) And as for that rather ambitious notice of default for about $26 million, that fact was taken care of by RE actually not having to "cure the default under all Weyrich's loans in order to protect its interest." All it had to do was cure the $4 million loan. (Id. at p. 1439.)
On remand RE still had one more card to play. It amended its complaint to assert a new theory that Investors had prevented the curing of the default on even the $4 million loan by its legal position that R.E. Loans had to pay off all $21 million of Transamerica's loans.
But by this time the Jack's Ranch property had already been lost to Investors, who purchased it at a foreclosure sale for $4,625,000. (See RE-1, supra, 212 Cal.App.4th at p. 1439.) As it turned out, curing the default on the $4 million loan would have been relatively inexpensive - a mere $320,000. (See R.E. Loans, LLC v. Investors Warranty of America, Inc. (B256149, Aug. 27, 2015) (RE-2).)
We take judicial notice of the unpublished RE-2 opinion, as did the trial court.
Investors demurred to the amended complaint on the ground that RE had not tendered any payment to cure the default. (RE-2, supra .) The trial court then agreed with Investors' need-to-tender argument, and sustained its demurrer.
And once again the appellate court reversed. This time the reversal was in an unpublished decision filed on August 27, 2015. It was Investors' demand for all $26 million that the RE-2 court found dispositive. That demand showed that tendering a cure of the $4 million loan would have been "futile." (RE-2, supra .) In fact, the RE-2 court even hinted that RE might yet be put back into the position it would have occupied if its right to reinstate the $4 million loan (and only the $4 million loan) had been respected. The court contemplated "equitable relief to effectuate the parties' expectations under the terms of the subrogation agreement and unjust enrichment." (Id. .) Investors was now facing yet more litigation stemming from its notice of default.
2. This Coverage Case
Back in May 2011, only about two months after the Glaser Weil letter discontinuing the defense, Investors had filed this case against Chicago Insurance and Chicago Escrow in Orange County Superior Court. The coverage case was bifurcated so as to first determine the "pure issues of law" in a bench trial. It is from the judgment after a court trial in that phase that this appeal has been taken. The court trial entailed the trial judge reading about 1200 pages of in limine and pretrial motions, plus 900-plus exhibits, not to mention voluminous testimony heard in July and August of 2015. A decision was entered on September 14, 2015, almost immediately after the appellate court's decision in RE-2. The trial court found Chicago Insurance had no duty to defend RE's suit against Transamerica and Investors (including as RE amended its suit after the RE-1 decision) and its decision to withdraw from the defense a year after assuming it was "objectively reasonable."
Specifically, the court ruled that the insuring clause of Chicago's 194 policy did not provide any coverage for the suit, and even if it did, the 3(a) and 3(d) exclusions applied. The court reasoned that there was no "defect in the insured title as of the date of the title policy." Rather, the "challenge to the priority of Transamerica's lien arose more than two years after the policy and only after R.E. twice agreed that Transamerica was in first position." Thus "Transamerica created" the dispute "in July of 2009 by demanding that it receive the entire proceeds from a potential $ 8.5 million sale of Jack's Ranch," a move which "depriv[ed] R.E. of millions of dollars."
And even if that conduct was not intentional, it was still beyond the coverage of the policy, said the court, citing Rosen v. Nations Title Ins. Co. (1997) 56 Cal.App.4th 1489, 1501 (Rosen).) The pinpoint cite to Rosen suggests the trial court was operating on the basis that title insurance only covers "title challenges which exist when the policy took effect, not after." That thought was corroborated in the trial court's reference to the fact RE had agreed at least twice, each time well after the policy was issued, that Transamerica's $4 million lien was indeed in first position. This determination on coverage had the collateral effect of making Chicago Insurance's termination of the defense reasonable.
The trial court also had kind words for counsel on both sides, noting they had been "unfailingly polite and respectful, traits becoming alarmingly rare in hotly litigated cases these days." We echo the trial court's approbation of counsel's conduct.
III. DISCUSSION
A. Coverage
1. Title Insurance Generally
Real estate is often analogized to a "bundle of sticks" to describe the various rights it entails. But when it comes to title insurance, those sticks often include dynamite. A good title search will identify the dangerous sticks that constitute various legal claims on property - a myriad of not-too-often-thought-about things like easements, life estates, leases, water rights, mineral rights, discrepancies in boundary lines, unpaid taxes, and of course, liens, both voluntary (such as mortgages) or involuntary (such as judgment liens). Some sticks can be removed, such as by paying off existing liens or buying out a third party's easement rights. Some can be lived with as extremely unlikely to explode - like a third party's claim to oil rights on a typical suburban tract home. Even so, ascertaining the existence of such dangers is a difficult, legally treacherous task. Third party claims can be buried in masses of verbiage, inscrutable diagrams, or set out in a language of metes and bounds and yards undecipherable even to most lawyers. "The records pertaining to real property are complex and encumbrances may be missed by even the most thorough search." (Siegel v. Fidelity Nat. Title Ins. Co. (1996) 46 Cal.App.4th 1181, 1191.)
One commentator traces the metaphor all the way back to an Aesop's fable in which a father shows his quarrelling sons that a bundle of sticks is stronger than a single one. (See Robert J. Goldstein, Green Wood in the Bundle of Sticks: Fitting Environmental Ethics and Ecology into Real Property Law (1998) 25 B.C. Envtl. Aff. L. Rev. 347, 368, fn. 132.) While the modern application of the metaphor to property is not totally clear, both the early Twentieth Century analytical jurisprudence professor Wesley Hohfeld and the jurist Benjamin Cardozo each receive some credit for it. (Id. at p. 367.)
Additionally, there is no way a title insurer can guarantee against what an owner might do to in the future. Title insurance is thus based on one specific moment in time - the precise time when the policy is issued. (Elysian Investment Group v. Stewart Title Guaranty Co. (2002) 105 Cal.App.4th 315, 320.) Title insurance is not "forward looking." (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 41.)
It is this non-forward-looking quality that makes title insurance different from other forms of insurance. As the North Carolina Supreme Court once observed, quoting New York's own highest court, "'The risks of title insurance end where the risks of other kinds begin.'" (See National Mort. Corp. v. American Title Ins. Co. (1980) 299 N.C. 369, 374 (National Mortgage), quoting Trenton Potteries Co. v. Title Guarantee & Trust Co. (1903) 176 N.Y. 65, 72.) And as the Seventh Circuit described title insurance in specific regard to lenders in BB Syndication Servs., Inc. v. First Am. Title Ins. Co. (7th Cir. 2015) 780 F.3d 825, 827: "To protect the priority of its security interest, the lender also purchases title insurance. Unique in the insurance world, title insurance differs from other forms of property and liability insurance in that it only covers losses from defects in title and lien priority (and similar title-related risks), usually requires only a one-time premium, and lasts for as long as the insured holds title (or, in this context, a security interest)."
These basic principles are manifested in two oft-litigated exclusions found in standard title policies. The moment-in-time nature of the insurance shows up in the standard "3(d)" exclusion (quoted in full in footnote 6, ante) for claims "attaching or created subsequent to Date of Policy." And the inability of title insurers to predict what owners might do with their property shows up in the 3(a) exclusion (also quoted in full in footnote 6, ante) for claims "created, suffered, assumed or agreed to by the insured claimant." There are enough cases on the 3(a) exclusion alone to justify an annotation in the American Law Reports. (See Blum, Title Insurance: Exclusion of Liability for Defects, Liens,or Encumbrances Created, Suffered, Assumed or Agreed to by Insured (2017) 27 A.L.R.7th Art. 6.)
In California, the published case that perhaps best embodies the 3(a) exemption for claim-of-your-own-making issues is Moskopoulos, supra, 116 Cal.App.3d 658. It was the only authority cited in Chicago Insurance's coverage counsel's letter terminating coverage so it bears some explication.
In Moskopoulos, an unscrupulous real estate broker spotted a property on famed Mulholland Drive that was in foreclosure. He tried to buy the property from the owners, then living out of state, but never received an acceptance. He did receive a counteroffer, but that counteroffer was soon revoked and never accepted. That didn't stop the broker. Even though he didn't have a contract, he filed suit for specific performance, a gambit which gave him the opportunity to record a lis pendens on the property. The lis pendens forced the out-of-state owners to settle, and they conveyed the property to the broker in the nick of time on the foreclosure date. The broker also obtained, in connection with that transaction, a title policy.
But the broker's ill-gotten gain was short lived. Although he dismissed his action against the now-former owners - it had served its purpose - they soon retaliated with their own suit, for various causes of action, including abuse of process and imposition of a constructive trust. (See Moskopoulos, supra, 116 Cal.App.3d at pp. 661-663.) The broker now wanted a defense from the title insurer. He got it, but under a reservation of rights, and the insurer then filed for declaratory relief. (Id. at p. 663.)
The appellate court in Moskopoulos had no difficulty affirming the summary judgment in favor of the insurer. There were no facts in the public record that suggested any defect in the title or encumbrance on it. Rather the action brought against the broker related "not to appellant's title in the property, but to the manner in which he acquired title." (Moskopoulos, supra, 116 Cal.App.3d at p. 665, italics added.) Given the insured's "conduct," no "reasonable construction of the policy could yield" converage, "nor could the insured reasonably expect the insurer to provide a defense under those circumstances." (Id. at pp. 665-666.) The court observed that the word "'created'" in the 3(a) exclusion meant "'conscious, deliberate causation'" as distinct from inadvertent or negligent conduct. (Id. at p. 667, quoting Hansen v. Western Title Ins. Co. (1963) 220 Cal.App.2d 531, 535-536.)
Three other cases the parties have extensively briefed follow in the same vein as Moskopoulos, shedding light on the 3(a) claim-of-your-own-creation exclusion. And as in Moskopoulous, each involved some shenanigans on the insured's part that precipitated the claim against the insured's title. Those cases are Rosen, supra, 56 Cal.App.4th 1489, Barczewski v. Commonwealth Land Title Ins. Co. (1989) 210 Cal.App.3d 406 (Barczweski) and Liberty National Enterprises, L.P. v. Chicago Title Ins. Co. (2013) 217 Cal.App.4th 62 (Liberty Enterprises).
Rosen exemplified something fairly typical in title insurance cases, a suit that arises from the misuse of loan funds. There, the title insurer insured a group of investors (mostly doctors) who funded two "priming" loans to a bankrupt contractor to develop certain property. Federal law gives priority to such bankruptcy priming loans. However, a bank lender had preexisting trust deeds on the proeprty. When the contractor squandered the priming loans, the bank sued to establish the priority of its own preexisting trust deeds, advancing the theory that the investors had been negligent in monitoring the loan proceeds. (Rosen, supra, 56 Cal.App.4th at pp. 1493-1494.) But there was no coverage because the event giving rise to the bank's attack on the investors' priority was "based on events occurring after [the insurer] issued its title policy" and therefore that insurer owed no duty to defend that action. (Id. at p. 1501.)
Like Rosen, Barczewski involved misuse of loan funds. The case involved an owner who executed a $3.2 million trust deed in favor of his family trust at the same time he was negotiating for a $1.3 million loan from a third party lender for the development of the property. He managed to get title insurance for the self-dealt trust deed and it was recorded. But the owner didn't tell the unsuspecting lender about it. About a week later the lender and the owner signed an agreement providing that the lenders' own trust deeds be given priority over existing encumbrances on the property - except the lender didn't know the $3.2 million trust deed had been recorded and it wasn't listed in the agreement. The owner got the loan, but he didn't use the proceeds for development. When the lender sued, the owner's wife (now the assignee of all interests of the family trust including the $3.2 million deed) sought a defense against the lender's requests that its loan should be given priority over the $3.2 million family trust deed of trust. (Barczewski, supra, 210 Cal.App.3d at pp. 408-409.)
The lender's theory was equitable subordination. Given the owners' duplicitous representations as to the use of the money, the lender thought equity demanded the owners' $3.2 million lien take a backseat to the lenders' new liens even though that $3.2 million deed of trust had been recorded at the time of the title policy. (Barczewski, supra, 210 Cal.App.3d at p. 409.) The appellate court held there was no coverage. After discussing Moskopoulos (id., 210 Cal.App.3d at pp. 411-412), the Barczewski court held that the insured was being sued for matters outside the public record and there was no coverage. (Id. at p. 413.)
Liberty Enterprises did not involve misuse of loan funds, but it was likewise a case in which the inequity of the insured's conduct was dispositive in a ruling there was no coverage. There, the majority faction of a family that owned a downtown Los Angeles commercial building was able to freeze out the minority faction of the family who had a 9.5 percent interest in the building by the device of the having the building go into foreclosure, with the majority faction then acquiring complete title to the building in a foreclosure sale. Obviously the process didn't make the minority group happy; they thought the majority faction had some fiduciary responsibility to look out for their 9.5 percent interest. The minority group sued to establish their 9.5 percent interest when they found out about it. The majority sought a defense from their title insurer. The appellate court held the title insurer correctly turned them down because the assertion by the minority faction was based on tortuous conduct "in the manner" in which the majority had acquired title. (See Liberty Enterprises, supra, 217 Cal.App.4th at p. 81.)
The multiple entities and interests involved in Liberty Enterprises are too numerous to be worth spelling out. Suffice to say they included some partnerships, hence the fiduciary duty claims.
2. Application to this case
Together, Rosen, Moskopolos, Barczewski and Liberty Enterprises winnow out much of the possibility of coverage for Transamerica-Investors from RE's suit. We note (as did the trial court) that the real world precipitant of the RE litigation was Investors' post-date-of-insurance decision to assert the legal claim, in the 2009 notice of default, that all three of liens totaling $21-plus million took precedence over RE's loan. The very act of making such a legal assertion was readily (as the trial court correctly perceived) excluded by the 3(a) exclusion for claims-of-one's-own-creation, as well as the 3(d) exclusion for claims arising subsequent to the date of the policy.
A fortiori the same goes for the new theory stated in RE's amended complaint. The amended complaint was predicated on Transamerica' implicit refusal to allow RE to reinstate the $4 million loan by making the legal assertion that all $21 million of its liens were higher in priority than RE's. And that happened years after the date of the policy.
But that does not resolve our case. Our case requires analysis of another factor: the insuring clause. Investors emphasizes that inherent in RE's original complaint was the idea that Investors' predecessor Transamerica was supposed to have violated the subordination agreement by the very act of recording the 194 trust deed itself, which was, after all, a matter within the public record. If the 194 title policy insured anything, surely it insured the priority of 194 trust deed.
We must agree. The underlying complaint contained facts that alleged the recording of the 194 deed of trust itself was a violation of the subordination agreement and thus necessarily left RE's $6.5 million deed of trust first in priority. Schedule B of the 194 policy explicitly states "the Company insures that these matters are subordinate to the lien or charge of the insured mortgage," and then follows a description of RE's $6.5 million trust deed. An ordinary reader would thus conclude the policy was insuring the priority of Transamerica's $4 million lien.
It appears that one of the reasons the trial court did not focus on this fairly subtle point - indeed, one reason this case has proven difficult for us to analyze - is that Investors, perhaps trying to be consistent with its position in the San Luis Obispo litigation, has asserted or implied in various places of its briefing that the 194 deed of trust also put its other liens ahead of RE's lien. That assertion dramatically overstates Investors' case. The 194 deed of trust cannot reasonably be read to contemplate the priority of the 192 and 193 liens.
On page 40 of its opening brief Investors asserts that the 194 deed of trust "secured an aggregate indebtedness of about $21 million. And on page 31 of its opening brief Investors seems amazed that RE would balk at the idea of subordinating its lien to all $21 million of Transamerica's total loans. We are certainly not so amazed, and neither was the RE-1 appellate court. If this case were only about Investors' assertion that the 194 deed of trust secured $21 million worth of loans as first priority, it would lose. As we explain in the next footnote, that is an unreasonable position.
To do so would violate elementary principles of contract interpretation. Reading all the documents that made up the Weyrich-Tranasmerica-RE transaction as a whole (see Civ. Code, § 1642; Katemis v. Westerlind (1953) 120 Cal.App.2d 537, 542) and construing those documents, if possible, not to contradict each other (see Civ. Code, § 1641; Dameron Hospital Assn. v. AAA Northern California, Nevada & Utah Ins. Exchange (2014) 229 Cal.App.4th 549, 568), the documents are easily harmonized. The subordination agreement was explicit that regardless of the any cross-collateralization or cross-defaulting, RE was only subordinating its lien to Transamerica's $4 million lien, whereas the loan agreement at best only implied a subordination to all three liens by the oblique allusion to cross-collateralization and cross-defaulting. The explicit specific triumphs over the implicit general. (E.g., Kanno v. Marwit Capital Partners II, L.P. (2017) 18 Cal.App.5th 987, 1017 ["a specific provision of a contract controls over a general provision to the extent there is an inconsistency"].) The result dictated by the documents is thus unavoidable: Reading them to be internally harmonious, the deed of trust gave priority to the $4 million lien, but it didn't give priority to the $11 million or $6 million liens.
But just because you overstate your case doesn't mean you lose. There is simply no way of avoiding the fact that RE's lawsuit sought to topple, inter alia, the $4 million lien based on the very recording of the insured deed of trust. Since that fact potentially implicated coverage, it triggered a duty to defend. (See generally Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 (Gray).)
Put another way, there were facts in RE's suit that didn't just implicate post-insurance events, they implicated the public record at the time the policy was issued as well. As Investors' opening brief puts it, the "complaint in the RE Action alleged that the subordination agreement was void in its inception."
Chicago Insurance's riposte to the problem that RE's suit targeted the filing of the 194 deed of trust itself is to invoke Moskopoulos' "manner of acquiring title" rationale. According to Chicago Insurance, RE's suit necessarily implicated that rationale. Chicago Insurance argues the attack on the priority of Transamerica's 194 deed of trust arose from the contract as distinct from a defect in the title to the deed of trust as such.
As to the manner-of-acquiring title point, try as we may, we cannot see the connection. In Moskopoulos, there was chicanery in the way the insured acquired the title in the form of filing a frivolous prior action and a frivolous lis pendens to pressure the owners of the Mulholland property to sell. But we cannot find any evidence of chicanery on Transamerica's part in obtaining priority for just its $4 million lien. That priority was agreed to in an above-board subordination agreement, and there is no question that Transmerica actually lent the money. Likewise, neither Barczewski (misuse of loan funds) nor Liberty Enterprises (violation of partnership fiduciary duties) precludes coverage based on an insured's actual recording of an allegedly defective document qua document.
Even the one out-of-state case to which we have been cited and which bears at least some superficial similarity to this one, National Mortgage, supra, 299 N.C. 369 doesn't help Chicago Insurance. Like Rosen and Barczewski, National Mortgage was a misuse-of-loan funds case. It was not decided on some theory of any inherent defect in the insured deed of trust.
Perhaps, for the sake of argument, we might indulge the idea that some clever lawyer in Transamerica's general counsel's office thought that Transamerica could pull a fast one on RE by the device of cross-collateralization and cross-defaulting, thus putting all $21 million of Transamerica's liens ahead of RE's lien. But this is a duty to defend case, and we need not remind Chicago Insurance that the liability insurer made that very mistake in the famous Gray decision - arguing a cynical intent to injure when the facts in the claimant's complaint still allowed for an innocent intent. To be sure, Dr. Gray might have intentionally battered his fellow San Francisco motorist in an act of road rage. But from the insurance point of view, the insurer also had to consider the possibility that Dr. Gray was simply trying to defend himself. Likewise here, while it may be tempting to assert Transamerica recorded a deed of trust that tried to sneak in more by way of priority than it was entitled to under the subordination agreement, we must also take into account the chance that Transamerica simply blundered into recording a deed of trust that violated the subordination agreement. And the need to consider an innocent intent is a rule that extends to title insurance as much as it does to car insurance. (See Home Fed. Sav. Bank v. Ticor Title Ins. Co. (7th Cir. 2012) 695 F.3d 725, 733 ["the clear majority view among courts of other jurisdictions is that the exclusion applies only to intentional misconduct, breach of duty, or otherwise inequitable dealings by the insured"].) The Gray rationale is as valid here as it was to standard liability insurance there.
We also think it important to note that Chicago Insurance's outside-the-contract argument requires us to do some micro-parsing of the concept of defective title and the idea that an insured title can, by its very recording, be a violation of contract. It is a distinction, we think, without a difference. Both ideas result in the loss of priority of an insured mortgage that the insuring clause expressly protects.
Moreover it is now established that just because a third party's claim is framed as a violation of a contract does not mean it is not covered in a liability policy. The idea that liability insurance never covers claims originating in contract was discredited over 20 years ago in Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 839 (Vandenberg). There the California high court, returning to fundamentals of insurance coverage analysis, reminded us that it is the "nature of the damage and the risk involved, in light of particular policy provisions," that "control coverage." (Ibid.)
We take our cue from Vandenberg. Looking at this case the old-fashioned way - construing the insuring clause broadly (though reasonably) and the exclusions narrowly - we must conclude a claim that might result in the displacement of the priority of the $4 million lien fits exactly within the insuring clause. To repeat the relevant text: "Subject to the exclusions from coverage, the exceptions from coverage contained in Schedule B and the conditions and stipulations, Chicago Title Insurance Company . . . insures, as of Date of Policy show in Schedule A, against loss or damage . . . sustained or incurred by the insured by reason of: . . . [¶] 6. The priority of any lien or encumbrance over the lien of the insured mortgage."
The fact the loss might have come in the form of a claim for breach of contract is thus, in this context, irrelevant. The very violation of the subordination agreement was inherent within the 194 deed of trust with its facial incorporation of the loan agreement. And of course the loan agreement was available to Chicago Insurance's underwriters. If Chicago Insurance had intended to exclude any vulnerability to the $4 million lien stemming from the loan agreement incorporated by reference into the insured deed of trust, it could have included such an exclusion in the policy.
But, one might still ask, what about the 3(a) exclusion for claims of one's own creation? After all, wasn't the recording of the defective deed of trust an act which Transamerica agreed to, based on a deed of trust created at Transamerica's behest?
The problem here is that application of the 3(a) exclusion based on the mere act of the insured's recording a defective title document would, as Investors reminds us, make the policy illusory. (See Safeco Ins. Co. v. Robert S. (2001) 26 Cal.4th 758, 765 [exclusions should not be read so broadly as to swallow up the very insurance provided in the policy].) If title insurance can be defeated by the simple act of agreeing to the recording of the very title document which turns out defective, then no one's title insurance is safe. Every owner or lender by definition agrees to the recording of the very document that is insured.
We therefore conclude that Chicago Insurance had a duty to defend Transamerica and Investors against RE's action. Fortunately for the trial court on remand, figuring out the extent of that contractual duty to defend turns out to be a fairly straightforward matter. Chicago Insurance defended Transamerica and Investors from the beginning of the RE litigation in early 2010 until it discontinued that defense in March 2011. The RE-1 litigation culminated in a decision that left the $4 million lien first, as stated in RE-1. Once that was decided, there was no possibility that RE's lien would be given any higher priority than Transamerica's $4 million lien, so there was no longer any possibility of coverage. (See Karl v. Commonwealth Land Title Ins. Co. (1993) 20 Cal.App.4th 972, 980 ["A title insurer undertakes to indemnify the insured lien holder only if a defect causes a loss."].) The RE-1 opinion became final in May 2013 when the California Supreme Court denied review. We therefore conclude that Chicago Insurance contractually owed Transamerica's and Investors' reasonable defense fees for the period March 2011 until the finality of RE-1 case in May 2013.
Finally, we must be clear that Chicago Insurance's duty to defend ended with the finality of RE-1. After RE-1 came RE-2. But RE-2 was, unlike RE-1, entirely based on Investor's post-policy conduct. If Investors was potentially exposed to a loss on its $4 million lien because it asserted all $21-plus million was due in its notice of default, such a loss was exclusively a matter of Investors' own creation based on an act well past the issuance of the policy. Any liability from Investors' notice of default was properly excluded by both the 3(a) and 3(d) exclusions. B. Reasonableness of Denial
This court is not unfamiliar with the uncertainty an insurer faces from a claim that is not clearly within - or clearly without - a policy's coverage. (See Morris v. Paul Revere Life Ins. Co. (2003) 109 Cal.App.4th 966 (Paul Revere) [first party case involving denial of disability benefits]; CalFarm Ins. Co. v. Krusiewicz (2005) 131 Cal.App.4th 273 (CalFarm) [third party case involving construction case where policy had defective and faulty work exclusions]; Griffin Dewatering Corp. v. Northern Ins. Co. of New York (2009) 176 Cal.App.4th 172 (Griffin Dewatering) [third party case involving release of sewage where policy had absolute pollution exclusion].) Indeed, uncertainty was the main theme of the Griffin Dewatering opinion, which the opinion underscored by allusions to Shakespeare's play on the same theme, Hamlet.
In the face of uncertainty, the law gives the insurer a big incentive to be reasonable in claim analysis. As explained in Griffin Dewatering, insurance contracts are unique in that if the policyholder suffers a loss but the insurer doesn't cover it, the policyholder doesn't have the alternative of obtaining another contract that will cover that loss. (Griffin Dewatering, supra, 176 Cal.App.4th at p. 195.) Insurance is not like widgets; the loss cannot be made up or ameliorated by going elsewhere. Accordingly, unlike the breach of other contracts, the unreasonable denial of an insurance claim subjects the insurer to tort damages in addition to contract damages. Anything less, noted the Griffin Dewatering court, would allow the insurer to deny a claim knowing the worst that would happen would be it merely had to pay what it owed on the contract anyway. The insurer in that situation would (like Hamlet's uncle at prayer) be allowed to "retain the fruits of its own offense." (Id. at p. 196.)
Thus the key to the issue of whether tort damages are available to the insured is the reasonability - or lack thereof - of the insurer's decision to deny the existence of coverage. As long as the decision is reasonable, tort damages are not available. As we said in Paul Revere, "As long as the insurer's coverage decision was reasonable, it will have no liability for breach of the covenant of good faith and fair dealing. An insurer which denies benefits reasonably, but incorrectly, will be liable only for damages flowing from the breach of contract, i.e., the policy benefits." (Paul Revere, supra, 109 Cal.App.4th at p. 977.) CalFarm encapsulated the rule: "If the conduct of the insurer in denying coverage was objectively reasonable, its subjective intent is irrelevant." (CalFarm, supra, 131 Cal.App.4th at p. 287, italics added.)
In the case before us, the trial court found Chicago Insurance's denial of coverage to be objectively reasonable after a full trial. While it is true that this panel has come to a different conclusion on whether the insurer's denial of a defense was correct, that does not mean we need not address the question of objective reasonability in this appeal. The underlying facts in this title insurance case - though Byzantine and neuralgic - are undisputed. As part III.A. of this opinion has perhaps shown all too well by its length and the numerous cases discussed, the case turns on finely parsed legal analysis rather than disputed facts. That makes the duty to defend here an issue of law to be reviewed de novo. "'While the reasonableness of an insurer's claims-handling conduct is ordinarily a question of fact, it becomes a question of law where the evidence is undisputed and only one reasonable inference can be drawn from the evidence.'" (CalFarm, supra, 131 Cal.App.4th at p. 293, quoting Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co. (2001) 90 Cal.App.4th 335, 346.)
In ascertaining reasonability, the easy cases showing reasonability are the ones where an insurer could adduce published California appellate precedent, plus support from other states. Such was the case in both Paul Revere and Griffin Dewatering.
In Paul Revere, jurisdictions around the country were split on the critical disability insurance law issue with seven in favor of the insurer. Besides winning at the trial level there were at least two other California appellate decisions in the insured's favor - the one that would ultimately be reversed by the Supreme Court in Galanty v. Paul Revere Life Ins. Co. (2000) 23 Cal.4th 368 - and another that had been the subject of a grant of review. (See Paul Revere, supra, 109 Cal.App.4th at pp. 970-971.) Similarly, in Griffin Dewatering, jurisdictions around the country were split on the question of how broadly the absolute pollution exclusion should be read. No less than four jurisdictions had ruled in the insurers' favor, and in California, "for a brief few weeks in early 2002" two published appellate decisions had also gone in the insurers' direction, though those two would be obviated by the decision in MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635. (See Griffin Dewatering, supra, 176 Cal.App.4th at pp. 200-201.)
But there are lesser levels of judicial support that will nonetheless compel a decision that denial was objectively reasonable. In CalFarm, this court found objective reasonability because "reasonable minds could disagree" on the abstruse issue of whether the cost to remove backfill to gain access to the back side of retaining walls to repair paint damaged by defectively applied sealant was covered. (CalFarm, supra, 131 Cal.App.4th at p. 288.) The case involved the oft-litigated "own-work" exclusion, and the analysis required this court to reexamine such insurance warhorses as a famous 1950's Minnesota case involving the removal of plaster (see ibid., discussing Hauenstein v. St. Paul-Mercury Indem. Co. (1954) 242 Minn. 354) and an early 1960's California Supreme Court case focusing on the cost of removing defective doors (see ibid., discussing Geddes & Smith, Inc. v. St. Paul Mercury Indem. Co. (1965) 63 Cal.2d 602). We found objective reasonability because the insurer could reasonably contend the cost of resealing the backside of the walls "would be purely preventive," designed only to prevent future paint damage from the defectively applied sealant. (See CalFarm, supra, 131 Cal.App.4th at p. 292.)
Whereas the authority bearing on coverage in CalFarm was varied and plentiful, it was downright lonely in Bosetti v. United States Life Ins. Co. in City of New York (2009) 175 Cal.App.4th 1208 (Bosetti), where the insurer was able to invoke only one published California decision to support its coverage denial. What was worse for the insurer, that decision (Equitable Life Assurance Society v. Berry (1989) 212 Cal.App.3d 832 (Berry)), as the Bosetti court explained, had been both (1) analyzed incorrectly and (2) abrogated by statute to boot. (See Bosetti, supra, 175 Cal.App.4th at p. 1229.)
But even though the Bosetti court found the Berry decision to be flawed, it found the insurer was still justified in relying on it. Justice Croskey, writing for the court in Bosetti, said: "While we now express our disagreement with Berry . . . we certainly cannot say that a disability insurer's reliance on the then sole California case to address the issue was in any way unreasonable." (Bosetti, supra, 175 Cal.App.4th at p. 1239, italics omitted.)
Bosetti, in fact, took its cue from Opsal v. United Services Auto. Assn. (1991) 2 Cal.App.4th 1197, in which the insurer didn't have any decision directly supporting its position at all - merely a footnote in a published decision. But it was a Supreme Court footnote, so it was ultimately good enough to justify the denial of coverage.
Opsal was a first party earth movement case from the days when "concurrent causation" was the big issue in first party insurance circles. The idea behind concurrent causation was that while a policy might clearly exclude loss caused by earth movement, damage to a home might be concurrently caused by something not excluded by an all-risk policy, third party negligence, including the negligence of a grading contractor. In Opsal the insurer denied coverage in 1986, prior to the Supreme Court's landmark Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395 (Garvey) decision, which considerably clarified the concurrent causation field. Garvey held that, yes, third party negligence could be its own - covered - cause of loss as long as it was the efficient proximate cause of that loss. (See id. at pp. 408, 412-413.)
However, in Garvey, the high court wrote a footnote - clearly dicta because the footnote itself said the issue was not before the court at the time - in which the court speculated that future courts might correctly distinguish between third party negligence arising out of construction for the "sole purpose" of protecting against an excluded cause of loss (e.g., earth movement, in which case the claim would not be covered) and "ordinary negligence" involving acts not "undertaken to protect against an excluded risk" (in which case the claim would be covered). (Garvey, supra, 48 Cal.3d at pp, 408-409, fn. 7.)
Even though the Garvey footnote did not exist at the time of the coverage denial, the insurer in Opsal court relied on the footnote to justify its denial when it was sued. The footnote didn't help. The year before the same appellate court in ruling against the same insurer had already rejected the Garvey footnote sole-purpose theory.
In Filippo Industries, Inc. v. Sun Ins. Co. (1999) 74 Cal.App.4th 1429 (Filippo) the appellate court said insurers could not rely on post-denial opinions after coverage to show the reasonability of a denial. Filippo distinguished Opsal on the theory that in Opsal the common law interpretation of the relevant policy language was "evolving." (Filippo, supra, 74 Cal.App.4th at p. 1440.) Later, in Paul Revere, this court expressly parted company from Filippo's analysis. We said "if, as in this case, the coverage issue turns upon analysis of a legal point - and assuming the governing law has not changed in the interim - the fact that a court had interpreted that law in the same manner as did the insurer, whether before or after, is certainly probative of the reasonableness, if not necessarily the ultimate correctness, of its position." (Paul Revere, supra, 109 Cal.App.4th at p. 976.) The case before us does not present a Filippo post-hoc justification problem. The main case on which Chicago Insurance relied here, Moskopoulos, was in existence at the time it denied coverage.
Nevertheless, in Opsal, the Garvey footnote was enough to secure relief for the insurer on the tort liability issue. (See Opsal, supra, 2 Cal.App.4th at p. 1203, discussing Davis v. United Services Auto. Assn. (1990) 223 Cal.App.3d 1322, 1330 (Davis).) The prior decision had at least acknowledged "a certain logical appeal" inherent in the Garvey footnote, even if that appeal was "superficial." (Opsal, supra, 2 Cal.App.4th at p. 1203, quoting Davis, supra, 223 Cal.App.3d at p. 1330.) Said Opsal: "Here, USAA denied coverage based on reasoning which presaged the Supreme Court's dicta in footnote 7 of Garvey. . . . While this court has declined to follow that dicta in Davis . . . we feel constrained to say the Supreme Court's footnote suggestion was not 'unreasonable' and provided 'proper cause' to support USAA's denial of coverage. As the Ninth Circuit Court of Appeals has explained in a similar context, bad faith liability cannot be imposed where there 'exist[s] a genuine issue as to [the insurer's] liability under California law.' (Safeco Ins. Co. of American v. Guyton (9th Cir. 1982) 692 F.2d 551, 557, disapproved on other grounds in Garvey, supra, 48 Cal.3d at pp. 410-411.) Clearly there exists 'a genuine issue . . . under California law' until the meaning of Garvey's footnote 7 is resolved." (Opsal, supra, 2 Cal.App.4th at pp. 1205-1206.) Again, the insurer's reasonable decision was honored.
Additionally, our task requires us to look to all the circumstances of a case in assessing objective reasonability. (See Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 724, fn. 7.) Looking at all the circumstances of this case, it is hard to escape the conclusion Chicago Insurance's denial of a defense of the RE-1 action was objectively reasonable.
We will begin by recognizing that there is no title insurance case out there exactly on point. Such a lacuna is not wholly unexpected given the highly unusual facts before us. This case comes to us as a bundled up tangle of documents - three separate trust deeds, three separate loans, a subordination agreement with a third party, and a single loan agreement - all tied together with the sticky strings of cross-defaulting and cross-collateralization clauses. That said, by way of comparison with Opsal, there is at least as much "logical appeal" for the insurer's position here as there was in Moskopoulos and Bosetti.
Recall our bundle of sticks with dynamite metaphor. In the case before us, even if the stick of dynamite was put in the bundle accidently by Investors' loan underwriters, it was still Investors that put it there. A reasonable mind could readily conclude that the RE-1 suit was a claim of Investors' own creation, similar - though less culpable - to the way the real estate agent's machinations in Moskopoulos resulted in a suit against him. Moreover, here, in positive contrast to Bosetti, the precedent represented by Moskopoulos is not subject to criticism as poorly reasoned or abrogated by statute. Though we distinguish it, Moskopoulos remains an excellent example of how the 3(a) claim-of-your-own-creation exclusion works.
In fine, we find the denial of coverage reasonable. Reasonable decisions will not always be correct, but in this area, the law requires them to be respected. C. The Escrow
The trial court also granted summary judgment in favor of the escrow company, Chicago Escrow. Investors' theory against the escrow company is that it had a duty to advise Transamerica about the discrepancy between what RE expected - subordination extending only to the $4 million lien - and what Transamerica expected - subordination of RE's deed of trust to the entire $21 million loan package. Basically, Investors says Chicago Escrow should have spotted the discrepancy and sought clarifying instructions. (See Spaziani v. Millar (1963) 215 Cal.App.2d 667 (Spaziani).)
Spaziani was a swindle case where a seller agreed to take back a deed of trust from the buyer, who misrepresented that he intended to put a construction loan on the undeveloped portion of the property. The seller thought she would be protected because a construction loan would necessarily entail improvements making the property more valuable. But the buyer got a purchase loan instead, which left the seller's deed of trust in a poor second position. The escrow company had closed escrow in the face of facially indefinite instructions on the construction loan - those instructions did not specify the parties, amount, or terms. (Spaziani, supra, 215 Cal.App.2d at p. 681.) The appellate court held that given the ambiguity of the instruction concerning the construction loan, nonsuit should not have been granted the escrow company. (Id. at pp. 283-284.)
Investors' argument is essentially a recycling of its main theory in the RE-1 action: That the 194 deed of trust secured, as Investors says on page 46 of its opening brief, "the entire loan facility of $20,476,850," such that Transamerica's deed of trust would "only be recorded if it was a first priority lien against Jack's Ranch in the amount of $20,476,850." As we have shown, that idea is objectively untenable as violative of basic rules of contract interpretation. Investors does not cite a single line or give us any record reference for specific escrow instructions it says Chicago Escrow failed to follow or which otherwise required further inquiry. Its approach on the escrow issue seems to be the same as attorney Titler's on the priority issue - the escrow company should have figured it out from oblique references in the deed of trust to the loan agreement. But that doesn't show any negligence on Chicago Escrow's part, only that they did not read an unreasonable conclusion into the deed of trust.
A term of art more familiar to lenders than lawyers.
IV. DISPOSITION
The judgment is reversed to the degree it provides that Chicago Insurance did not have a duty to defend Transamerica and Investors in the RE-1 litigation from March 2011 until May 2013. The cause is remanded for the trial court to calculate the amount Chicago Insurance owes by way of defense costs for that period.
In all other respects the judgment is affirmed, including (a) the court's determination that Chicago Insurance's declination of defense costs in March 2011 was objectively reasonable and thus no tort damages are available to Transamerica and Investors and (b) the summary judgment in favor of Chicago Escrow.
In the interests of justice we hold that all parties will bear their own costs on appeal. Not only do we have a split decision, but this entire expensive litigation can be traced back to Investors' unreasonable overreading of its own deed of trust.
BEDSWORTH, ACTING P. J. WE CONCUR: FYBEL, J. IKOLA, J.